Krishnamurthi v Patel
[2023] NZHC 736
•5 April 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-669
[2023] NZHC 736
BETWEEN SIVAMANI KRISHNAMURTHI
Plaintiff
AND
ALOK PATEL
First Defendant
GULF HARBOUR FOODS LIMITED
Second Defendant
Hearing: 23 March 2023 Appearances:
M Pascariu and J Murdoch for the Plaintiff L Ponniah for the Defendants
Judgment:
5 April 2023
JUDGMENT OF ASSOCIATE JUDGE BRITTAIN
This judgment was delivered by me on 5 April 2023 at 2.00 pm.
Pursuant to Rule 11.5 of the High Court Rules.
…………………..
Registrar/Deputy Registrar
Solicitors/Counsel
Hamilton Locke, Auckland Ponniah Law, Auckland
SIVAMANI KRISHNAMURTHI v ALOK PATEL [2023] NZHC 736 [5 April 2023]
Background
[1] The second defendant, Gulf Harbour Foods Limited (GHF), operates a Four Square supermarket in Gulf Harbour, Whangaparaoa. The first defendant, Alok Patel, is the sole director and registered shareholder of GHF.
[2] The plaintiff, Sivamani Krishnamurthi, alleges that GHF is a joint venture vehicle, and that Mr Patel holds 24.5 per cent of the shares in GHF on constructive trust for him. Mr Krishnamurthi further alleges that Mr Patel has failed to account to him for his share of the profit from the joint venture, in breach of Mr Patel’s fiduciary duty owed to Mr Krishnamurthi.
[3] In his statement of claim dated 28 April 2022, Mr Krishnamurthi alleges two causes of action:
(a)the first is against Mr Patel for breach of fiduciary duty, seeking a declaration that Mr Patel holds 24.5 per cent of the shares in GHF on constructive trust for Mr Krishnamurthi, and an account of profits;
(b)the second is against Mr Patel and GHF for relief under s 174 of the Companies Act 1993, on the basis that the affairs of GHF have been conducted in a manner that is oppressive, unfairly discriminatory, or unfairly prejudicial to Mr Krishnamurthi. Mr Krishnamurthi seeks an order that Mr Patel account to him for his share of the profits, and an order directing that GHF’s share register is rectified pursuant to s 91(1) of the Companies Act to record Mr Krishnamurthi as shareholder of
24.5 per cent of the shares. Mr Krishnamurthi also seeks an order that Mr Patel is then required to acquire his 24.5 per cent shareholding.
[4] GHF has applied for orders that the second cause of action, as against GHF only, be struck out and that GHF be removed as a party, on the grounds that the statement of claim discloses no reasonably arguable cause of action against GHF.
Legal principles
[5] Pursuant to r 15.1(1) of the High Court Rules 2016 (HCR), the Court may strike out all or part of a pleading if it:
(a)discloses no reasonably arguable cause of action; or
(b)is likely to cause prejudice or delay; or
(c)is frivolous or vexatious; or
(d)is otherwise an abuse of the process of the Court.
[6] The principles governing strike-out applications are summarised in the Court of Appeal decision in Attorney-General v Prince,1 as endorsed by the Supreme Court in Couch v Attorney-General:2
(a)A strike-out application is to proceed on the assumption that the facts pleaded in the statement of claim are true unless those pleaded facts are entirely speculative and lack any foundation.
(b)It is only where, on the facts alleged in the statement of claim, however broadly they are stated, no private law claims of the kind or kinds advanced can succeed that it is appropriate to strike out the proceedings at a preliminary stage.
(c)The threshold for strike-out is high. Before a proceeding may be struck out the causes of action must be so clearly untenable that they cannot possibly succeed.
(d)The jurisdiction is one to be exercised sparingly, and only in a clear case where the Court is satisfied it has the requisite material.
1 Attorney-General v Prince [1998] 1 NZLR 262 (CA) at 267.
2 Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].
(e)The fact that an application to strike out raises difficult questions of law, and requires extensive argument, does not exclude the jurisdiction.
[7] Under r 15.1(3), the Court has a discretion to stay all or part of the proceeding instead of striking out all of part of a pleading. It may be appropriate to make an order staying part of a proceeding if justice may require the cause of action to be determined at a later date.3
Submissions
The applicant
[8] GHF submits that it is not necessary for it to be a party to the first cause of action because relief is only claimed against Mr Patel and the company’s interests are not affected.
[9] Regarding the second cause of action, GHF submits that an order for rectification of the share register under s 91(1) of the Companies Act is made against the director, not the company, and the only relief claimed under s 174 is against Mr Patel. On that basis, GHF says that it is unnecessary for it to be a party to the second cause of action, and that s 174(3) confirms that the company need not be a party unless an order is to be made against the company.
The respondent
[10] Mr Krishnamurthi argues that a company must be named as a party to an application under s 91 to rectify the share register, and in any proceeding under s 174.
[11] Counsel for Mr Krishnamurthi advised the Court that Mr Krishnamurthi proposes to amend the first cause of action, to incorporate the claim under s 91 of the Companies Act, on the basis that “compensation” under s 91(2) includes compensation for any distributions of profit from the company that ought to have been made to
3 Hyslop v Society of Lloyd’s (1992) 6 PRNZ 204 (HC) at 217.
Mr Krishnamurthi, rather than to Mr Patel. It is argued that after this amendment, the company will be required as a party to the first cause of action.
Sections 91 and 174 of the Companies Act
[12]Section 91 of the Companies Act provides:
91 Power of court to rectify share register
(1)If the name of a person is wrongly entered in, or omitted from, the share register of a company, the person aggrieved, or a shareholder, may apply to the court—
(a)for rectification of the share register; or
(b)for compensation for loss sustained; or
(c)for both rectification and compensation.
(2)On an application under this section the court may order—
(a)rectification of the register; or
(b)payment of compensation by the company or a director of the company for any loss sustained; or
(c)rectification and payment of compensation.
(3)On an application under this section, the court may decide—
(a)a question relating to the entitlement of a person who is a party to the application to have his or her name entered in, or omitted from, the register; and
(b)a question necessary or expedient to be decided for rectification of the register.
[13]Section 174 of the Companies Act provides:
174 Prejudiced shareholders
(1)A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the court for an order under this section.
(2)If, on an application under this section, the court considers that it is just and equitable to do so, it may make such order as it thinks fit
including, without limiting the generality of this subsection, an order—
(a)requiring the company or any other person to acquire the shareholder’s shares; or
(b)requiring the company or any other person to pay compensation to a person; or
(c)regulating the future conduct of the company’s affairs; or
(d)altering or adding to the company’s constitution; or
(e)appointing a receiver of the company; or
(f)directing the rectification of the records of the company; or
(g)putting the company into liquidation; or
(h)setting aside action taken by the company or the board in breach of this Act or the constitution of the company.
(3)No order may be made against the company or any other person under subsection (2) unless the company or that person is a party to the proceedings in which the application is made.
[14] Section 2(1) of the Companies Act defines “entitled person” to mean a shareholder and a person upon whom the constitution confers any of the rights and powers of a shareholder. There is no suggestion that the constitution of GHF confers on Mr Krishnamurthi any of the rights and powers of a shareholder.
[15]Section 96 of the Companies Act provides:
96 Meaning of shareholder
In this Act, the term shareholder, in relation to a company, means—
(a)a person whose name is entered in the share register as the holder for the time being of 1 or more shares in the company:
(b)until the person’s name is entered in the share register, a person named as a shareholder in an application for the registration of a company at the time of registration of the company:
(c)until the person’s name is entered in the share register, a person who is entitled to have that person’s name entered in the share register under a registered amalgamation proposal as a shareholder in an amalgamated company.
[16]Section 163 of the Companies Act is also relevant:
163 Interpretation
In this Part, unless the context otherwise requires, the terms entitled person, former shareholder, and shareholder include a reference to a personal representative of an entitled person, former shareholder, or shareholder and a person to whom shares of any of those persons have passed by operation of law.
Analysis
[17]The applications by GHF raise the following issues:
(a)Does Mr Krishnamurthi presently have standing to bring an application under s 91 and/or s 174 of the Companies Act?
(b)Is Mr Krishnamurthi’s claim to beneficial ownership, without more, sufficient to constitute him a shareholder for the purposes of s 174?
(c)Is Mr Krishnamurthi a shareholder for the purposes of s 174 on the basis that shares have passed to him by operation of law?
(d)If the answers to issues (b) and (c) are no, can the word “apply” in s 174 be given a broad construction, so that standing is assessed at the time of trial, rather than when the application is first filed?
(e)Is Mr Krishnamurthi’s standing under s 91, as a person aggrieved, determined on the same basis as his standing under s 174?
(f)If Mr Krishnamurthi’s has standing under s 91 and/or s 174, is the company a necessary party to the proceedings?
[18] Issues (a) to (e) are intertwined and will be discussed together. Issue (f) is discreet and will be dealt with first.
If the plaintiff has standing under s 91 and/or s 174, is the company a necessary party to the proceedings?
[19] The learned authors of Company Law opine that the company is the proper respondent to an application under s 91 of the Companies Act.4
[20] Under s 91(2), the Court has a broad discretion to order relief if a person has been wrongly omitted from a share register, including an order that the company pay compensation. It necessarily follows that the company is the proper respondent to an application under s 91.
[21] I do not accept GHF’s submission that the effect of s 174(3) is that the company need not be a party if relief is not expressly claimed against the company. The Court has a broad discretion under s 174(2) to determine the appropriate relief if shareholder oppression is established. Orders may be made against the company even if not expressly included in the prayer for relief.
[22] Even if s 174(3) is construed as providing the plaintiff with an election as to whether to join the company, where a plaintiff chooses to join the company, it is difficult to conceive of a situation where it would be appropriate to remove the company as a party.
[23] If Mr Krishnamurthi has standing under s 91 and/or s 174, then GHF is a proper party to the second cause of action.
Does the plaintiff have standing under s 91 and/or s 174?
[24] Beneficial owners are not reflected in a company’s share register, because s 92 of the Companies Act provides that “[n]o notice of a trust, whether expressed, implied, or constructive, may be entered on the share register.” The starting point is that Mr Krishnamurthi is not a shareholder as defined in s 96.
4 Stephen Revill and Linda Howes (eds) Company Law (online ed, Thomson Reuters) at [CA91.03].
[25] In RPB Solutions Ltd v Avoca Holdings Ltd, the High Court held that a beneficial interest in shares was insufficient for standing under s 174.5 This finding was cited by the Court of Appeal without demur in Gavigan v Eichelbaum.6 In that case the Court did accept, however, that if a party claiming beneficial ownership of shares was subsequently registered as a shareholder, then that party would have standing to claim oppression of a minority in respect of the period prior to registration of their shareholding, when their holding was a beneficial one.7
[26] Mr Krishnamurthi’s alleged beneficial interest in the shares is presently insufficient to give him standing under s 174. Something more is required to sustain a finding that the shares have passed to Mr Krishnamurthi by operation of law under s 163.
[27] In Vey Group Ltd v Vance, the Court of Appeal discussed the expression “passed by operation of law”.8 In that case, the shares were registered in the names of trustees of an express trust but there had been a change of trustees by a court order. The High Court subsequently made an order vesting the shares in the new trustees. Kós P said:9
Beyond death and bankruptcy, a chose in action may pass also by operation of law under vesting orders made by the Court. But here no such orders were made until Grice J made them on 7 August 2018. In normal circumstances the Vey shares would not be said to have passed to the respondent by operation of law until those vesting orders were made.
[28] However, the actions of the company’s director amounted to the company’s unequivocal recognition of shareholder status for the new trustees. The remaining act of registration was merely procedural, with the result that the shares had passed to the new trustees by operation of law prior to the vesting order.10
[29] In Material Resources and Trading Corp v Registrar of Companies,11 it was accepted that the applicant was the beneficial owner of the shares, however something
5 RPB Solutions Ltd v Avoca Holdings Ltd [2010] 2 NZLR 857 (HC) at [23].
6 Gavigan v Eichelbaum [2017] NZCA 412, [2018] 2 NZLR 530 at [60].
7 At [65].
8 Vey Group Ltd v Vance [2020] NZCA 232, [2021] 2 NZLR 541.
9 At [24] (footnote omitted).
10 At [28].
11 Material Resources and Trading Corp v Registrar of Companies [2019] NZHC 286.
more than a claim to beneficial ownership was required for standing under s 91. Fitzgerald J said:12
The ability of the Court to rectify a company’s share register is a discretionary power to ensure the register correctly reflects that which ought to have been done. As Mr Andrews notes, rectification is an equitable remedy. To obtain rectification, the applicant must show it has some equity which the Court will protect. In considering such an application, the Court must take into account all of the circumstances of the case and consider what equity the applicant has to support the application.
[30]Fitzgerald J referred to two prior decisions where standing was accepted:
(a)in Masson v Barloy Enterprises Ltd,13 where the applicant was entitled to be registered after the death of the registered shareholder, however there was no existing person with authority to effect the registration; and
(b)in Parkinson v James Products Ltd,14 where the registered shareholder was acknowledged to be a nominee, holding the shares on trust for the applicants. There had been a transfer of legal title in the shares from the nominee to the applicants, but the respondent company’s director was refusing to register the transfer, on the basis of asserted pre- emptive rights.
[31] In Material Resources and Trading Corp, the nominee registered shareholder was a company that had been removed from the register of companies and was therefore unable to transfer legal ownership of the shares to the beneficial owner.15 The Court considered that restoring the nominee company to the register for it to then transfer the shares was a course of action which would give rise to unnecessary complexities and that, in any event, the shares at issue were in a company whose sole director was unavailable to register any transfer in shareholding.16 The Court accordingly granted rectification under s 91.17
12 At [19] (footnotes omitted).
13 Masson v Barloy Enterprises Ltd HC Auckland CIV-2009-404-5243, 23 September 2009.
14 Parkinson v James Products Ltd [2009] NZCCLR 8 (HC).
15 Material Resources and Trading Corp v Registrar of Companies, above n 11, at [23].
16 At [27].
17 At [29].
[32] In Modern Built Investments Ltd v O’Brien,18 the Court of Appeal stated that where a company has wrongly failed to make entries that should have been made in the share register, then those omissions can be rectified under s 91 or s 174.19
[33] Goddard J drew a distinction between situations where the effect of a valid share transfer is in issue, so far as the obligation of the company to record that transfer is concerned, and situations where the validity of contracts or dealings underlying a purported transfer of shares are in in issue.20 In proceedings related to the latter, the company is not a necessary party and in the absence of special circumstances would not be properly joined.21
[34] Goddard J held that the reference in s 174 to “shareholders” extends to persons who are entitled to be registered as shareholders but who have not been so registered.22
[35] Mr Pascariu, counsel for the plaintiff, referred to two other cases where the Court was prepared to exercise its discretion under s 91: Thomson v Surch23 and Rodgers v Advanced Creative Technologies Ltd.24 Neither assist the plaintiff. Thomson v Surch proceeded by way of formal proof, and there appears to have been no contest to the plaintiffs’ claim to beneficial ownership of shares. Rodgers v Advanced Creative Technologies Ltd concerned a situation where directors had failed to comply with s 84 of the Companies Act and wrongly refused to register a signed share transfer. Neither case involved a dispute between parties as to the beneficial ownership of shares.
[36]The authorities demonstrate that it is important to distinguish between:
(a)issues with the share register, dependant on the formalities prescribed for share transfers by the Companies Act, where the Court has a discretion to rectify the register; and
18 Modern Built Investments Ltd v O’Brien [2021] NZCA 405.
19 At [103].
20 At [104].
21 At [106].
22 At [110].
23 Thomson v Surch [2022] NZHC 820.
24 Rodgers v Advanced Creative Technologies Ltd [2013] NZHC 577.
(b)substantive disputes between parties regarding beneficial ownership of shares, whether the dispute rests on the assertion of equitable rights or contractual rights.
An unregistered party will have standing under ss 91 and 174 in the former situation but not in the latter.
[37] Mr Krishnamurthi claims beneficial ownership of shares which are in the legal ownership of Mr Patel, and properly registered in his name. Mr Patel does not recognise Mr Krishnamurthi as a shareholder. On the contrary, Mr Patel’s pleading denies that Mr Krishnamurthi has any beneficial interest in the shares of GHF.
[38] In this case, perfection of a transfer of legal ownership of the shares requires more than a procedural act of the company. It requires the Court to impose a constructive trust, together with either a vesting order or an order compelling Mr Patel to sign a share transfer. Mr Krishnamurthi has not yet acquired 24.5 per cent of the shares in GHF by operation of law, and s 163 does not constitute him a shareholder with standing under s 174.
[39] Similarly, Mr Krishnamurthi’s equitable claim is not amenable to relief under s 91 of the Companies Act, which is available to cure a default in a procedural act required to complete a transfer of shares under ss 84 to 86 of the Companies Act. Standing under s 91 and s 174 should be consistent.
[40] Finally, it is necessary to consider whether it is open to Mr Krishnamurthi to argue that his standing under ss 91 and 174 can be determined at trial, assuming success of his first cause of action.
[41] In Vance v Vey Group Ltd, the High Court at first instance rejected a submission that the only relevant date for determining standing under s 174 is when the application for relief is filed, rather than the date of the hearing.25 The Court’s reasoning was based on a broad construction of the word “apply” in s 174.
25 Vance v Vey Group Ltd [2019] NZHC 1676, [2020] NZCCLR 5 at [56]–[57].
[42] On appeal, the Court of Appeal was not required to address the High Court’s construction of “apply” because of its finding that standing existed under s 174 at the time the application for relief was filed (see discussion in paras [27] and [28] above).26 Nonetheless, the Court of Appeal observed that the High Court’s construction of the word “apply” was consistent with the equitable approach to s 174 confirmed by the House of Lords in O’Neil v Phillips:27
We start by observing that the statutory jurisdiction conferred on the Court by s 174 is in essence an equitable one. As Lord Hoffmann observed of the comparable English provision, in O’Neill v Phillips:
In section 459 Parliament has chosen fairness as the criterion by which the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative history … that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable. But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles. …
This Court has confirmed the same as true of s 209 of the Companies Act 1955, 16 and true of s 174 in the 1993 Act.
[43] The facts in Vey Group Ltd materially differ from the present case. No issue had been taken with standing when the application under s 174 was first filed, and before the trial of the s 174 proceeding orders were made by consent enabling the new trustees to be registered as shareholders. That is different to the present case, where any order in Mr Krishnamurthi’s favour which would entitle him to be registered as a shareholder cannot be made until the conclusion of the same trial which would also determine his s 174 claim.
[44] In Vey Group Ltd, the Court of Appeal’s determination of standing as at the date the application was filed is consistent with the other authorities discussed in this judgment, which all determined standing as at the date that the s 174 proceeding was filed. I accept that to be the correct approach.
[45] Therefore, Mr Krishnamurthi does not presently have standing to bring an application under s 91 and/or s 174, and he cannot acquire such standing until his first
26 Vey Group Ltd v Vance, above n 8, at [29].
27 At [21] (footnotes omitted). See O’Neill v Phillips [1999] 1 WLR 1092 (HL) at 1098.
cause of action has been determined. The signalled amendment to the first cause of action, to add a claim under s 91, will not alter the position and would be amenable to strike out.
Strike out or stay
[46] In the present case, if Mr Krishnamurthi is successful with his first cause of action and an order is made vesting 24.5 per cent of the shares in GHF in him, or if Mr Patel is directed to sign a share transfer, then those shares will pass to Mr Krishnamurthi by operation of law. Mr Krishnamurthi will then have standing to obtain relief under s 174 of the Companies Act, including relief in respect of conduct while he was a beneficial owner of the shares. GHF will be a necessary party to the proceeding.
[47] Rule 10.4 of the HCR provides the Court with a discretion to order separate trials of causes of action, and to direct the sequence of those trials, when justice requires. This is an appropriate case for separate trials of the two causes of action, and for an order staying the second cause of action until further order of the Court. If Mr Krishnamurthi is successful with his first cause of action, then the stay can be lifted and the second cause of action can proceed. If Mr Krishnamurthi is unsuccessful with his first cause of action, then it will be appropriate for the second cause of action to be struck out.
Discovery
[48] During argument, it emerged that one of the underlying concerns of the plaintiff is discovery of GHF’s financial records, relevant to the claim for an account of profits. The plaintiff has intimated that it will shortly file an application for further discovery from the defendant.
[49] Although the second cause of action will now be stayed, Mr Patel is the sole director of GHF and he has effective control and possession of the company’s accounting records. It will be no answer to an application for further discovery for Mr Patel to assert that he is not required to discover the company records.
Costs
[50] Both parties have had a measure of success in respect of this application. The application has been progressed with very brief affidavit evidence on behalf of GHF, which was also adduced for the purpose of resolving a discovery issue. Legal submissions were confined and the hearing was completed in an hour and a half. Costs incurred by both parties are modest in the context of the overall litigation. For these reasons, costs should lie where they fall.
Result
[51] The second defendant’s application for orders that the second cause of action as against the second defendant be struck out, and the second defendant be removed as a party, is dismissed.
[52] The second cause of action in the plaintiff’s statement of claim dated 28 April 2022 is stayed pending further order of the Court.
[53]Costs on the application lie where they fall.
Next steps
[54] The issues with discovery raised by the plaintiff need to be resolved. I make the following directions:
(a)The plaintiff shall file any interlocutory application for further discovery, including supporting affidavits, by 28 April 2023.
(b)The first defendant shall file any notice of opposition, including affidavits in support, by 19 May 2023.
(c)The proceeding is adjourned to a case management conference before me on 24 May 2023 at 4.30 pm. The conference will deal with disposition of any interlocutory applications, and outstanding matters under sch 5 to the High Court Rules 2016, including readiness for trial and a pre-trial timetable.
Associate Judge Brittain
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